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Performance Promises And Liabilities In Designbuild Agreements

Sunday, March 04, 2007 11:37 am

 

As design-build agreements become more widely used, case law shows that the parties to these agreements -- as well as the judges who interpret them -- do not always fully understand them. Specifically, the parties may be confused about liability for performance warranties and guarantees. This article provides an overview of those misconceptions and how they've played out in various courts so that judges, lawyers, owners, contractors and others can take steps to protect themselves from liability or defend against liability in litigation.

Owners that enter into design-build contracts have one primary challenge: letting go of their control over the project.

In traditional design-bid-build arrangements, the owner and architect hash out the project's design and then the owner hires a contractor to build the structure. The architect becomes the owner's "eyes and ears, policing the construction project and protecting the interests of the owner by evaluating and criticizing the performance of the general contractor." (Stephen Wichern, Protecting Design-Build Owners Through Design Liability Coverage, Independent Construction Managers, and Quality Control Procedures, 32 Transportation Law Journal 35 (Fall 2004)). Under this model, the owner also gives the contractor an implied warranty that the plans and specifications are free from defect and the contractor can build the structure exclusively from those plans and specs. If the contractor incurs damages due to defective plans or specs, it can recover from the owner under the Spearin doctrine (see U.S. v. Spearin, 248 U.S. 132 (1918) and Gordon Hunt and John Darling, Practice Tips: The Allocation of Risks in a Design/Build Construction Project, 21 Los Angeles Lawyer 21 (Jan. 1999)).

In design-build, however, the owner turns over all design and construction work to one entity. In so doing, the owner avoids the implied warranty liability described above. "A properly written and administered design-build contract transfers the risk of design insufficiency from the [owner] to the design-builder. The owner is shielded when the design results in cost overruns or does not work," the Veteran's Administration Board of Contract Appeals explained in Appeal of Donahue Electric, Inc., VABCA No. 6618 (Dec. 27, 2002). Yet the owner also loses its ability to implement quality control measures in the design and construction phases. An owner that insists on making significant changes to the design-build entity's plans and specs opens itself up to Spearin doctrine liability. For example, the American Association of State Highway and Transportation Officials Joint Task Force on Design-Build, Current Design-Build Practices for Transportation Projects, para. 6.3, cautions that "Owners that involve themselves in the design process to a significant degree, placing considerable constraints on the designbuilder, could be held liable for the entire project design." The same liability risks arise when an owner uses an architect not associated with the design-build firm to make significant changes to the design-build entity's plans and specs (see Hunt and Darling).

In Donahue, the Veterans' Administration (VA) entered a design-build contract with Donahue Electric Inc. for renovations to an ambulatory care center in Las Vegas. The VA specified the boiler Donahue should install and supplied a sterilizer for the company to install. Donahue made a claim for an equitable adjustment for the costs of dealing with and remedying the problems [...]

 
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